Private Assistance

Not since the expansion of railroads in the 19th century has such a horde of international capitalists been so eager to invest in our transportation.
December 2006
Alex Marshall
By Alex Marshall  |  Columnist
Senior Fellow at The Regional Plan Association in New York City

During a recent trip to Australia, I spotted this news item: Former U.S. Transportation Secretary Rodney Slater and several other notables were now on the advisory board of Transurban Group, an Australian company whose business plan includes operating roads for profit in the United States. Transurban had recently signed a 99-year lease for the Pocahontas toll road in Virginia, winning it after another group--a public-private partnership--lost money when traffic on the highway failed to live up to projections.

Not since the expansion of railroads in the 19th century has such a horde of international capitalists been so eager to rush into such dangerous and unpredictable territory--and been so eagerly abetted by an army of current and former public officials, some of them actually not on the companies' payrolls. Yet.

Here's a word of warning to both sides. The historical record shows that private investors have often lost money on transportation projects and that public purposes have often been thwarted by the involvement of private capital. In the past, transportation systems have worked best when they are largely planned, designed and funded by the public. That's the only way to achieve a comprehensive transportation system that's used by the most people for the overall public benefit, as opposed to a fractured system used by a few.

Looking back over the previous two centuries, the country has lurched back and forth in the degree it has involved private companies in essential transportation endeavors. In the early 1800s, New York State built the Erie Canal entirely with public money, which resulted in arguably the most successful public works project of all time. Other states eagerly followed suit but found their canals were not as useful--and thus failed to pay their bills.

A generation later, private companies took the lead in developing the nation's railroads but with a lot of government help. States and the federal government in the mid-19th century gave away as much as one- fifth of the total land area of the United States to private companies, along with hundreds of millions of dollars and special powers such as eminent domain. While the country did get a railroad network, many towns and cities, and their farmers and merchants, found themselves at the mercy of railroad companies their tax dollars had helped finance. The system was fragmented and offered vastly different levels of service and pricing.

Then there's New York City's subway system. In 1894, the public approved municipal ownership of the subway in a referendum. Under the final deal, the city financed and owned the first system, which opened in 1904, but it was leased to and operated by a private company whose emblems were prominently displayed on cars and uniforms. Construction of other lines followed similar arrangements. This accounts for the false assumption some scholars and public officials have that the subways were originally privately owned. Not the case.

As to roads, the nation developed its first road system a century ago almost entirely with public money and planning. The early federal Bureau of Public Roads--set up as part of the federal Agriculture Department--developed and set paving standards and helped coordinate what was mostly state and county funding and construction. Governments built roads to every nook and cranny of the country, with no thought about whether each one would pay for itself.

Now, with revenues from the gas tax flat or falling, there's talk of changing that system. Virginia, Texas and California have been leaders in privatizing road construction and operation. They also have been early leaders in failed projects and voter backlash.

The reason it's so hard to make money on transportation is simple: Laying concrete, buying trains and planes, and building airports and stations are very expensive. Once infrastructure is in place, a ride on a road or a seat on a plane becomes a commodity, and the price often falls to cost or below cost. The billionaire investor Warren Buffett, having lost millions buying airline stock, famously declared that a time-traveling capitalist would go back and shoot the Wright brothers, because no one had ever made money on air travel. Economic historians have calculated that when all was said and done, the private railroads lost money on passenger train travel.

Still, if international investors want to put in their billions, why not let them? Just make sure the deals are structured so that private companies bear all the risks and the public comes out ahead, even if a deal goes bad.